IRIDEX Corporation (IRIX) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Q1 2021 IRIDEX Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Hunter Cabi, Investor Relations. Please go ahead.

Thank you and thank you all for participating in today’s call. Joining me are Dave Bruce, Chief Executive Officer and Fuad Ahmad, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended April 3, 2021. A copy of the press release is available on the company’s website. Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical facts, including but not limited to, statements concerning our strategic goals and priorities, product development matters, sales trends and markets in which we operate. All forward-looking statements are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place reliance on these statements. For a discussion of the risks and uncertainties associated with our business, please see our most recent Form 10-K and Form 10-Q filings with the SEC. IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 11, 2021. And with that, I will turn the call over to Dave.

Good afternoon and thank you all for joining us. Our first quarter was marked by strong top line performance, continued operational execution and substantial progress across our strategic initiatives. On today’s call, I will cover the highlights of our first quarter 2021 results, how we are focused today and how we will execute for our longer term market opportunity. Fuad will cover financial results and guidance for the fiscal year and then we will open the call for questions. IRIDEX had a strong start to 2021 achieving a multi-year record for first quarter total revenue. Revenue in the first quarter was $12.0 million, a 33% year-over-year increase. This improvement was a result of a number of factors. First, we maintained strong momentum in our glaucoma product family, with record international G6 probe sales and a significant rebound in console sales. Second, our retina business also rebounded strongly, with sales up to 61% from the prior year to $6.7 million. This included a contribution of about $1.1 million from PASCAL products acquired as part of our collaboration agreement with Topcon. Third, we believe our sales and marketing programs are having effect building awareness and demonstrating the many benefits of our non-incisional glaucoma chromotherapym, in short, creating sales traction. Overall, we were very pleased to see demand for IRIDEX products increasing both in our glaucoma and retina markets and in the U.S. and internationally, despite continued impacts from COVID restrictions around the world during that first quarter. I am encouraged by the multiple growth catalysts we have on the horizon, including improved sales infrastructure, broader distribution capabilities, a pipeline of enhanced products, expanded key opinion leader support, and industry awareness. And importantly, we have a significantly strengthened balance sheet in place to support strategic initiatives designed to leverage these catalysts. We added $19.5 million in funds from Topcon Corporation as part of the strategic collaboration we closed in March and combined with continued strong cash management, we ended the quarter with a cash position of $28 million. Our cash usage in the quarter was approximately $600,000 from operations and $500,000 from non-recurring payments associated with the Topcon transaction. This was despite already having begun our investments in sales and marketing programs designed to accelerate growth, which I will explain in a minute. Turning our focus on the glaucoma business, our Cyclo G6 product family revenue was $3.3 million, an increase of 15% year-over-year. During the first quarter, we sold 13,600 Cyclo G6 probes, a 4% year-over-year increase despite lingering COVID-19 impacts, which you should recall were particularly widespread early in the quarter when countries such as Germany re-imposed lockdowns. The sales strength was broad-based as volumes from Japan were strong and Asia-Pacific, Europe, Middle East, Africa and Latin America all recovered meaningfully driving international glaucoma probe sales higher by 18% year-over-year and setting a new quarterly record for international probe volumes. In the U.S., probe sales, was slightly below Q1 of 2020, which we attribute to a combination of relative strength last year as customers bought inventory pre-lockdown and this year’s restrictive environment in the first half of the first quarter when U.S. COVID cases were peaking. Overall, the growth we have seen in glaucoma probe sales is encouraging on many levels. Importantly, it signals a strategic shift to emphasize higher physician utilization is showing results, while in parallel highlighting growing customer support for the enhancements in our revised probe, which was launched last year. Moving to our Cyclo G6 glaucoma laser systems, we sold 64 units in the first quarter of 2021 compared to 38 in the prior year. This increase is a rebound from the understandable hesitancy on capital purchases last year as we entered the pandemic. We now see business opening toward more normal operation. Turning to retina, we saw related product revenue grow nearly 61% year-over-year, including a 16% contribution from sales of PASCAL products acquired from Topcon. The surge in revenue can be attributed to a return from deferred purchases relating to COVID, but also to our renewed commitment to our retina product line. As you can see, we are enjoying your return on those investments as the business landscape improves. As we announced earlier, in the first quarter, we entered into a strategic collaboration with Topcon Corporation’s $430 million revenue eyecare division. As part of this collaboration, Topcon purchased exclusive distribute distribution rights in Asia-Pacific, in key EMEA markets for IRIDEX retina and glaucoma products, which accounted for approximately 60% of our international revenues. In addition, IRIDEX acquired Topcon’s PASCAL laser product line, adding it to our MicroPulse and TxCell retina scanning laser platform. And Topcon purchased 10% of IRIDEX common shares. The total deal netted $19.5 million in new funds to IRIDEX. We saw immediate results from collaboration, including a 10% revenue contribution to our top line from sales of PASCAL products we acquired under the agreement and began selling in the last 3 weeks of the quarter following its closing. In April, we began notifying our effective international distributors of our transition to Topcon’s distribution network and we are actively working in these regions to transition and new distributors while minimizing any potential midyear disruption to sales volumes. We have high confidence and the potential for this collaboration and look forward to updating you on our progress and results as we work through the integration. Next, I would like to take a few minutes to talk about where we are focused now and highlight some of the investments for growth that we are making in our sales organization. Late last year, we assessed the timing was right to expand our sales team and invest in further clinical and market development efforts to accelerate sales, particularly in glaucoma products. In the first quarter, we executed the following. First, we split and expanded the U.S. sales team growing from 12 hybrid territories, selling both glaucoma and retina products to 12 dedicated glaucoma territories and 6 dedicated retina territories. We shifted some internal staffing and hired to fill the remaining new positions. Training activities are essentially complete and we expect the new members will soon be ramping up their contributions. We began increasing our investments in clinical evidence and closer key opinion leader relationships that can improve confidence and adoption of our non-incisional Transscleral Laser Therapy products. And finally, we budgeted for the anticipated return of in-person trade meetings and local clinical events that will require greater investment that we expect to payoff downstream. Of note, we are exhibiting live with the Hawaiian Eye and Retina Meeting, our first significant non-virtual event since February of 2020. This is the first meeting in which we showcased the PASCAL laser and our new 810 laser. Both the reception and attendance at the meeting had been good. Later this year, we plan to attend an expanding schedule of live domestic and international events, including the American Society of Cataract and Refractive Surgery meeting in July in Las Vegas, the American Society of Retina Specialists in October in San Antonio, the European Society of Cataract and Refractive Surgery in Amsterdam during October, and the American Academy of Ophthalmology meeting in New Orleans in November. As we entered the second quarter and look towards the reminder of the year our company is emerging from the pandemic in a strong position. We are optimistic we can overcome the obvious challenges from continued pockets of COVID resurgence in international regions, the shift in parts of our international distribution network, and how quickly our sales and marketing investments can generate results. We have made significant progress throughout the past year despite extraordinary circumstances. Our focus continues to be on capitalizing on our opportunities for growth and increasing the long-term shareholder value IRIDEX. With that, I would like to turn the call over to Fuad.

Thank you, Dave and good afternoon everyone. I will now go over our financial performance for the first quarter of fiscal ‘21. Starting with revenue, total revenue for the first quarter of fiscal ‘21 was $12 million, up 33% from $9 million in the first quarter of last year and down only slightly sequentially. Revenue from glaucoma product family in the first quarter of fiscal ‘21 was $3.3 million, up 15% compared to the first quarter of fiscal ‘20. We sold 13,600 G6 products in the quarter, up 4% from the same period last year and essentially flat sequentially. We saw particularly strong year-over-year growth outside of U.S. despite COVID-related headwinds worldwide. We sold 54 Cyclo G6 systems in the first quarter of fiscal ‘21 compared to 38 in the prior period and 57 in the fourth quarter of fiscal ‘20. We believe the increase in system sales reflects assumption of customer appetite for investments in capital equipment that can lead to future G6 probe utilization. Moreover, one indicator of the underlying strength of our glaucoma business is demonstrated by the relatively small sequential quarterly decline in glaucoma revenue compared to historical fourth quarter to first quarter decline. Our retina product revenue improved significantly in the first quarter of fiscal ‘21 posting a 61% increase compared to same period last year. Although our results for the first quarter of fiscal ‘21 include revenue from our acquisition of the PASCAL product line from Topcon, even adjusting the PASCAL revenue, year-over-year growth was approximately 35%. Other revenue, which includes royalties, services and other legacy products, were approximately $2 million in the first quarter of fiscal ‘21 and flat compared to the prior year period. Gross margin in the first quarter of fiscal ‘21 declined 210 basis points to 31.3% compared to the first quarter of fiscal ‘20. Gross margin decline is primarily attributable to a greater portion of the revenue coming from our retina wholesale business, including PASCAL product line, which runs our lower margin. However, overall average selling prices across our product lines remained relatively flat year-over-year and sequentially. Operating expenses for the first quarter fiscal ‘21 were $6.8 million compared to $5.6 million in the same period of prior year, a 22% increase. The increase was due primarily to additional expenses from the acquisition of the PASCAL business and certain non-recurring Topcon transaction and integration expenses. Net loss in the first quarter of fiscal ‘21 was $2 million or a net loss of $0.14 per share, up from $1.7 million or a net loss of $0.12 per share from last year. Cash usage in the first quarter was $1.1 million, including approximately $500,000 of non-recurring Topcon transaction payments. We ended the first quarter of fiscal ‘21 with cash and cash equivalents of $28 million, up from $11.6 million from the end of fiscal ‘20. The increase in cash is a result the proceeds from the Topcon transaction offset by the cash burn in the period. Turning to our outlook for the remainder of the year, as the world slowly emerges from the pandemic we are becoming increasingly confident in our ability to forecast. We also feel it is important for us to share our longer term view of the business with our shareholders and investors even in these somewhat uncertain times. Therefore, we will resume our prior practice of providing full year guidance. With that said, our guidance for fiscal ‘21 is as follows. We expect total revenue for fiscal ‘21 to be between $48 million to $51 million, G6 probe sales are expected to range from $56,000 to $59,000 and Cyclo G6 glaucoma laser system sales are expected to range from 250 units to 275 units. With that, Dave and I would like to turn the call over to the operator for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Jon Block with Stifel. Your line is now open.

Hey, guys. This is Tom Stephan on for Jon. Thanks for the questions. Maybe start off on guidance, G6 expectations for the year were just a bit light of where we were particularly in probe. So, Dave, maybe you can just talk to that a bit and how we should think about maybe the progression of the year? I mean, it sounds like international is very strong and U.S. maybe came back in the second half of 1Q, so any color there would be helpful?

Sure, Tom. So yes, international rebounded, it had been slight declines in prior quarters and it rebounded. And so this is – it’s a quarter-over-quarter kind of thing, right, it’s not a steady March and there is some volatility involved. So they were down for a couple of quarters sequentially and then just had a strong comeback and was almost the flipside in the U.S., it had been quite strong in third and fourth quarter and just was – just slightly behind now. And we really do think that a lot of that was, as I mentioned in the comments, the relative strength of the first quarter last year and the first half of the first quarter this year, still had pretty significant restrictions in a lot of geographies around the U.S. as COVID cases were peaking. So, we just think its part of the bouncing around from quarter-to-quarter. In terms of the longer term, it’s difficult to forecast, as I think you have seen in others, where the transitions occur, where the surge returned, we are very comfortable that we are driving adoption. We are encouraged to see new systems placements that indicate customers. New customers want to adopt the technology. The trick is in the rate at which that comes along. And so we are still a bit conservative, possibly on how that develops through the course of the year, whether there is some impact midyear as we transition some of the distributors internationally and how that unfolds in the course of this year. ‘21 is clearly going to have some transition elements to it, overlaying the underlying fundamental strength. So we are very encouraged in general and just looking out quarter-over-quarter to try to be practical in the actual events that occur.

Great. All helpful color. I am actually going to stick with guidance and then maybe go back to G6 a bit. But if you do some implied math with the revenue guidance, we are getting to a roughly $15 million G6 number for the year and then nearly $35 million for retina and other, yet 1Q retina and other revenue of $8.7 million give or take annualized already gets you to that $35 million number we are calculating, but you haven’t really experienced the full contribution from PASCAL whether new laser is falling out in that 1Q number? So, kind of a long headwind intro there, but are we thinking about this the right way and can you just maybe talk to the pushes and pulls for the retina and other?

Yes. So, retina also experienced some surge that internationally similar to the experience of glaucoma probes. So there is that component overlaid in the first quarter. And then there is also the potential transition as existing distributors, potentially sell their remaining inventory, Topcon comes up to speed acquiring inventory, adopting the sales and distribution in those areas and we are certainly allowing for some flat areas as that transition occurs. And we haven’t seen the full impact of PASCAL sales in the quarter yet, but we did bring some inventory into the quarter that we were able to sell. So, the impact in the quarter was relatively strong for the short portion of the quarter that we were booking revenue from the PASCAL product line.

Got it. That makes sense. Maybe last one for me just on going back to G6 and utilization there, the change in the G6 selling approach has been in place for, I think close to 2 years now. And the second gen probe has also been out there for, I think, well over a year now. So, Dave, maybe you can talk to this, just around are you seeing the mix of utilization increase sort of downstream in the mild-to-moderate glaucoma population or has it still largely stayed consistent in the more advanced patient pool?

We are clearly strongest in the more advanced patient pool segment. Our efforts are focused on making clinicians comfortable, with more moderate stage patients and making the decision to treat pre-incisional. And I think that segment is growing. But I think it takes time and people’s experience and then they want to have a chance to see the durability to track patients for a couple of quarters and see how long we are really getting the results. We are confident the results are there, but we are also cognizant that they need to have that experience as well. So, it’s an unfolding story. I think that shift is still largely a big opportunity for us. And that’s one of the things we are focused on part of the reason why we have expanded our direct sales force in the U.S. to really deliver that message more strongly and have engaged a broader set of key opinion leaders to help support that message, so that it’s coming from the clinical community rather than coming from IRIDEX. I think those are all things we will see payoff during 2021.

That’s great. I think that’s it for me. Thanks, guys.

Okay. Thanks Tom.

And our next question comes from Scott Henry with ROTH Capital. Your line is now open.

Thank you and good afternoon. Certainly busy times for you these days.

Hi, Scott.

Couple of questions. Retina and excluding PASCAL has been very strong in Q4 and in Q1 of 2021. How do you think about retina kind of ex-PASCAL in Q2 versus Q1 sequentially?

Well, we are very encouraged that retina has rebounded for IRIDEX. We made some specific investments in the area to improve the product line. We have focused some sales and marketing efforts there. And I think as we are seeing the world try to emerge from COVID pandemic, we experience a return to order volumes internationally and domestically and we are winning a good share of that business. So, we are quite encouraged by that. And we are cognizant that it’s possible there is a bit of a rebound effect going on in the short-term since there were a lot of deferred orders. And so we are optimistic that, that position in the market continues, our new strength continues, but it’s difficult to predict the same kind of surge of total business to last through the entire year. So, that’s the challenge in forecasting. We feel like we have better visibility and we have a stronger position in the marketplace, but there is still going to be ebbs and flows for the rest of the year.

Okay. And I am just trying to look at it from a full year perspective and get a sense of how this trajectory should play through. I mean, would you expect second quarter revenues to be higher than the first quarter, I mean you are getting a benefit from a full Topcon quarter in there as well, just trying to get a sense? And along that lines would you expect systems sold to tick up in 2Q from first quarter? I guess were the other things that I would expect the second half to be stronger than the first half given COVID and all of your marketing efforts?

Well, we are not forecasting the second quarter. We are giving the full year guidance number. Historically, the first quarter has been a dip compared to the fourth quarter with a small rebound into the second quarter. That’s kind of the historical seasonality that we see in the mix of business and short of advising on that, at this point in the quarter, we are getting full year guidance. But yes, like I said, to one of your earlier questions, I do think our strength in selling segments has increased and our product offerings are more competitive. And so we are comfortable with the guidance that we have given.

Okay. Fair enough. And then shifting over to the expense items, I believe operating expenses were about $6.8 million in first quarter, what portion of the quarter was Topcon in there and are there – how much – how many one-time expenses would we kind of think about deal-related in that first quarter?

Yes. So, let me answer that. So in Q1, we had approximately $600,000 of one-time expenses, transaction-related integration-related just of non-recurring. I mean, so those will not come up again in the subsequent quarters. However, I think you also recognized that Q1 only had 1 month of the Topcon or the PASCAL business acquisition expenses. So, those will continue at full clip quarterly rate. So, I think if you are looking at OpEx quarter-over-quarter, you should expect a slight increase over Q1. So one-time expenses are trailing off, but they are really you take over the full burden of the PASCAL business going forward and so they were set. And then finally, we are going to see a pickup in sales and marketing expense. Dave already pointed out in his prepared remarks that we are already seeing resumption of activities and the trade shows and our sales folks will end up traveling again. So there is going to be uptick in sales and marketing expense. So, you should see a slight uptick from that price for full quarter of the PASCAL business, so expect OpEx to be slightly above, not meaningfully, but slightly above where we were in Q1.

Okay, thank you. That’s helpful. And then I don’t think the 10-Q is out yet. And there are a lot of moving levers, where would you expect shares to be in real time right now?

Approximately 15.5 is the quarter round number. And we expect that to kind of change very minimally going forward.

Okay, great. And then Dave, I think you said that the pricing on the glaucoma side was pricing stable, just kind of backing it out right now till we get to 10-Q. But I was trying to get a sense of how pricing was relative to Q4?

Actually, it’s both on the system side as well as on the probe side on the glaucoma. It’s been fairly stable throughout ‘20 and into ‘21. We haven’t seen any degradation either internationally or U.S. in terms of ASPs and there hasn’t been any pricing pressure that we have experienced.

Okay, great. Thank you for taking the questions.

Thanks, Scott.

Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to David Bruce for closing remarks.

Thank you, operator and thank you all for joining the call. We appreciate your support and look forward to reporting on our progress in the future. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.